The City of Chicago recognizes the importance of liquidity and has added to long-term reserves while tightening its costs in FY15, CFO Carole Brown told Debtwire Municipals in an interview.

The city’s latest CAFR, released today, reflects progress with the city’s internal financial controls as well as its cost-tightening and stabilization of the general fund, Brown said. There were no material weaknesses with the audit this year, as opposed to several when Mayor Rahm Emanuel (D) first took office, Brown said, emphasizing the huge liabilities that the administration inherited. General fund expenditures came in USD 105.6m less than budgeted, according to the latest CAFR.

But the city’s pension liabilities cast a shadow over the financials, leading Chicago’s net deficit to widen by 266% to USD 23.8bn in FY15, from USD 6.5bn in FY14, primarily caused by reporting requirements under GASB Statement No. 68. For FY15, the city disclosed a USD 33.8bn net pension liability for its four pension funds — the prior year, it reported a USD 19.7bn unfunded accrued actuarial liability.

Brown stated that an Illinois Supreme Court ruling earlier this year hampered the city’s efforts to get a handle on its pensions.

Now, the soaring pension liability hits Chicago’s CAFR just as efforts to raise revenues preventing its largest fund from running out of money may be complicated.

A recent property tax increase authorized for the Chicago Board of Education may make it more difficult to raise taxes for the city’s pension funds, said Thea Okin, a research analyst at Western Asset Management. Chicago introduced a plan for its smallest pension fund, but has not released a formal plan for its largest—the Municipal Employees Annuity and Benefit Fund—yet.

Brown pointed out that the State of Illinois authorized this property tax increase, and that the city remains committed to getting on a stable path to fund its pensions.

And while pensions may remain a sore spot for the municipality, downsized health care costs provide a silver lining. This is the city’s “third year in a row of an annual decrease in retiree health care costs as the city continues to phase-out retiree health care benefits for certain retirees,” said a spokesperson for the city.

Retiree healthcare costs for FY15 fell to around USD 44m from USD 112m three years ago, according to city officials.

But what the market is most concerned about is the Windy City’s liquidity and reserves, as reported. Chicago ended FY15 with a USD 215.2m general fund balance, up 52% from its USD 141.3m FY14 balance. Its service concession and reserve fund remained relatively stagnant at USD 621.3m.

“The general fund balance is a direct result of cost savings and reform measures instituted by Mayor Emanuel each budget along with our ongoing work to closely match expenditures with incoming revenue,” a spokesperson for the city said.

“We continue to recognize the importance of liquidity,” Brown said. The city also added USD 5m to the city’s long-term reserves this year, said budget director Alexandra Holt.

“I have a pretty good handle on the [city’s] problems, and the magnitude of those problems,” said Nicholos Venditti, a portfolio manager at Thornburg Investment Management. “The more interesting and important question is what’s going to happen from here on out.”

Chicago plans to hit the market with USD 1.25bn in bonds in 3Q16, as reported, after increasing its debt load by USD 1bn in FY15, according to the CAFR. It had USD 8.7bn in general obligations outstanding at the end of FY15.

A USD 128.5m tranche of Series 2011A bonds maturing in 2040 last traded in odd lots on 7 July at 99.9 yielding 4.9%, according to Electronic Municipal Market Access.

Moody’s rates Chicago Ba1/negative; S&P rates it BBB/negative. Fitch Ratings assigns a BBB-/negative rating on the city — or one notch above junk — while Kroll grades it BBB+/negative.